The government’s irresponsible economic policies are imperiling recovery and bringing efforts to rebuild Tōhoku’s shattered industrial sector to a standstill. This discredited administration must step down immediately for the good of the country, says economist Nariai Osamu.

The June 18 issue of the Economist had a bleak message of warning about the stalled global recovery. The cover carried an illustration of an ice cream cone loaded with two large scoops, both starting to drip around the edges. Presumably the two scoops of overheating ice cream were meant to represent the United States and the euro zone economies. But from a Japanese perspective, the prospects of a meltdown feel much closer to home. Burdened with an administration that is incapable of reaching a decision on macroeconomic policy or on integrated reform of the tax and social security systems, and facing tough demands from the IMF, government and politics in Japan are close to collapse. Economic policy in particular is a disaster waiting to happen.

In the United States, legislation to raise the public debt ceiling narrowly squeaked through the House of Representatives after a prolonged political tussle. In Europe, the situation of Greece’s public finances is no better than it was a year ago. European Union leaders have managed to stave off calamity for now by persuading private-sector creditors to refinance Greek national bonds—but the withdrawal of Greece from the euro or the return of the deutsche mark are no longer out of the question. For now, the stability of the euro depends on whether Europe’s political leadership can persuade voters that the long-term benefits of a regional union outweigh the short-term costs.

The Risk of a Technology Drain

But the political and economic crisis engulfing Japan is even more serious than the situation in the United States and Europe. The Diet recently ratified a second supplementary budget to fund reconstruction, even though the first supplementary budget has hardly been put into effect. The reality is that the budget is being deliberately doled out in dribs and drabs in order to prolong the life of the Kan administration. As a result, rebuilding efforts in Tōhoku are grinding to a halt. On July 22, the Cabinet Office issued its Annual Report on the Japanese Economy and Public Finance. The report shows no evidence that the government understands the true nature of the crisis facing Japan. Although it acknowledges that the overall trend of the economy continues to be deflationary, it shows little awareness of the problem of supply constraints since the disaster. Even if the supply of components from Tōhoku factories recovers from the immediate effects of the disaster, restoring the interrupted supply chains to pre-disaster levels will almost certainly prove impossible. Japanese companies have been quick to relocate to Taiwan and South Korea, and newly emerging economies are working hard to lure Japanese components manufacturers to build factories and other infrastructure in their countries.

Emergency repairs on the Port of Kobe were completed within two months of the Great Hanshin Earthquake in 1995, allowing the port to resume container handling on a limited basis. But it was another two years before rebuilding was complete and the port was fully operational again. By this time, much of the port’s container business had relocated to South Korea and other countries in Asia, and Kobe was handling only around half the volume it had been handling before the quake. Even after the port reopened, only about 20% of this lost volume returned to Kobe. The Tōhoku disaster areas are learning from this experience now. Even if the government announces that manufacturing has made a recovery, many companies have already decided not to return to Tōhoku. Given the ongoing electricity shortages, many companies will continue to shift production away from Tōhoku. This is likely to be a major problem for the region for some time to come. Toray Industries, a globally important company that supplies the carbon fiber materials used in Boeing’s latest aircraft, has already announced that it will shift production to South Korea.

There is a real possibility that cutting-edge technologies jointly developed over more than 30 years by Japanese industry, government, and academia will be relocated to South Korea. Japanese companies are making cold, rational decisions based on economic factors. These include the unstable power supply situation and the vacillating economic policies of an unreliable political administration.

The Government’s Worthless White Paper

The government needs to lay out a clear economic policy before it is too late. Failure to do so will only accelerate the hollowing out of Japan. At the moment, the prospects are far from promising. When Kan took over as prime minister last June, one of his banner policies was the integrated reform of the tax and social security systems. This idea seems to have gone up in smoke. After a lot of huffing and compromise the Democratic Party of Japan did eventually submit a proposal for reform on June 30. Incredibly, this measure couldn’t even get cabinet approval, thanks to shamelessly populist objections from short-sighted politicians opposed to the idea of raising the consumption tax. The political irresponsibility of the situation is staggering.

In reality, the reforms need to target much more than just raising the consumption tax. The DPJ came to power on the back of a campaign that promised to “put people’s lives first.” They promised to look at social security benefits, to resolve the inequalities in society, and to build a sustainable social security system. Now the party has apparently got cold feet and no longer has the will to design a better system for people’s futures or fix the taxation system. It is time to throw in the towel and let someone else have a go. This year’s economic white paper needed to analyze the government’s policies and offer suggestions for change. But the days of well considered economic reports are apparently over. A report like this one, full of puffery about priorities for achieving consistency with medium-term fiscal policies, is bereft of significance.

Even before the March 11 disaster, Japan faced pressing issues regarding the state of its public finances and the sustainability of its social security system. It is now clear that Kan is quite incapable of responding to this moment of national crisis, as a politician and as prime minister. The sooner he steps down the better. Is it really asking too much to expect politicians to engage in serious debate about Japan’s economic policies and to have the guts and integrity to argue their case in good faith before the people? Our situation is dire indeed. We cannot allow this weak and ineffectual government to continue in office any longer. (Written on July 26, 2011.)

Nariai Osamu

Graduated from the University of Tokyo, where he majored in economics. Served in various posts at the former Economic Planning Agency and as a senior economist at the Institute for International Policy Studies. Is now a professor at Reitaku University. Also active as an independent economist. His works include Exploring the Japanese Economy.